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6:15 pm
June 1, 2011
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Jae Jun
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true. Maybe that's why the tests I've performed so far on that hasn't produced any profitable results.
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5:11 pm
May 27, 2011
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ankitgu
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Be careful with looking at a difference in cash flow and net income – if a company is growing, you can be profitable and still have negative cash flow or even just significantly reduced cash flow compared to net income. This happens because your accounts will grow – A/R, Inventory, PP&E, etc.
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9:36 am
April 15, 2011
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somrh
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Thanks for reminding me of this. I completely forgot about it. He did some studies on the C-Score and has some pretty charts. Here is some of the text on the results:
In the USA, stocks with high C-scores underperform the market by around 8% p.a., generating a return of a mere 1.8% p.a. In Europe, high C-score stocks underperform the market around 5% p.a, although they still generate absolute returns of around 8% p.a.
Both tests were run between 1993-2003. He then added a valution criteria of price to sales ratio greater than 2. In both cases the high P/S combined with high C-score generated -4%.
The book has 4 chapters in the short selling section. This chapter is one of them. The article I linked below is another one. It was a good read.
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5:14 pm
March 30, 2011
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Jae Jun
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More Montier shorting criteria taken from
http://streetcapitalist.com/20…..t-selling/
Excerpt: Details of the C score Page 263 of Value Investing Tools & Techniques for Intelligent Investment
1. A growing difference between net income and cash flow from operations.
2. Day sales outstanding is increasing.
3. Growing days sales of inventory
4. Increasing other current assets to revenues.
5. Declines in depreciation relative to gross property plant and equipment.
6. High total asset growth.
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10:13 am
July 22, 2010
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Jae Jun
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other ideas would be basic accounting fundamentals such as inventory growth much faster than sales growth.
Receivables growth greater than sales growth.
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8:53 am
July 21, 2010
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somrh
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Although I don't presently short, I have intentions of developing a hedge strategy in the near future. I personally think Montier's criteria look good but might also look at a few additional criteria (either as separate screens or as additional requirements). Here are my thoughts:
- Minimum Volume Requirement (for obvious reasons)
- Stocks that don't pay dividends – no point in having those cut into my returns unless I'm really confident in the pick – I imagine that most of the stocks that come up on the screen don't pay dividends so this probably won't be a huge factor.
- Some metric regarding short interest – part of the reason I suspect value investing works is due to the contrarian approach that is taken. So if everyone else is shorting a stock, it means I shouldn't (and perhaps means I should consider buying).
- Low Altman Z-Score – shorting companies that go bankrupt can be profitable.
Those are some ideas I'm currently playing with (in addition to the ideas that Montier has). Any thoughts, comments or other ideas would be appreciated.
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7:34 am
July 20, 2010
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somrh
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Jae Jun said:
The no.3 point is interesting. I assume it's included because a company growing its asset base where sales is not increasing to cover asset costs will hurt a company.
It is definitely interesting. I'm not sure exactly what the explanation is for it. I suspect you're on the right tract and this seems to be along the lines of what Montier is suggesting.
He sites a study where corporate executives were asked to reflect on their past investment ideas. What they found was "17 percent of the capital invested by their companies went toward underperforming investment that should be terminated and that 16 percent of their investments were a mistake to have financed in the first place". And this is what the corporate executives said, more objective criteria might show that they are still overrating their performance. This is the motivation Montier provides for the research and that seems to be along the lines of what you're saying.
Montier then points to the actual research which comes from a paper called Asset Growth and the Cross-Section of Stock Returns. I haven't read the entire article but after skimming it, I didn't find much in the way of why this might be the case from a value based perspective aside from investors overpricing the growth in assets.
The empirical data shows that in the US (for the period measured), low asset growth stocks beat high asset growth stocks by 13% and for Europe the difference in return was similiar (10%).
I would have to wonder how many stocks in the "high asset growth" group are companies which are making sound, productive and profitable investments. I would assume some are in which case Montier's explanation isn't sufficient. The mispricing idea is certainly a good candidate. I would think more research is required (or maybe I should just finish reading the entire paper to see, in more detail, what the author's have to say.)
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2:04 pm
July 19, 2010
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Jae Jun
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James Montier is a great investor and great writer. I haven't had a chance to go through all of this books, but the pieces that I have read, I found very insightful and intellectual.
The no.3 point is interesting. I assume it's included because a company growing its asset base where sales is not increasing to cover asset costs will hurt a company.
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7:13 am
July 19, 2010
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somrh
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Post edited 7:14 am – July 19, 2010 by somrh
I'm new to the forum and I noticed that this section was empty so I thought I would fill it in with a post.
James Montier is a behavior finance researcher and investor and I just finished his recent book Value Investing: Tools and Techniques for Intelligent Investment. Part of the book is devoted to short selling because he claims that short sellers are fundamentally minded individuals but they look at stocks in from the opposite perspective. This enables one to establish a hedge strategy by going long one good value stocks while going short on overvalued stocks.
One of the chapters from the book can be found here: Joining The Dark Side: Pirates, Spies and Short Sellers. To summarize (for those of you who don't want to read the article), he offers three criteria for selecting short candidates:
1) Price to Sales > 1
2) Piotroski Fscore 0-3
3) Total Asset Growth > 10%
The article gives his reasoning for the screen, the evidence for why each of those picks out poor performing stocks as well as evidence that the portfolio does worse than the market in many years.
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